Holiday shopping to signal pace of economic recovery

Right here, right now, the strength of the economic recovery is playing itself out.

“This year’s Christmas season will provide considerable insight into how the recovery proceeds,” says a University of North Florida report for the third quarter of the year.

“If consumers spend freely during the holiday season, it will promote businesses to expand investment and perceive that capital expenditures and increased hiring will be advantageous for the upcoming year and beyond,” says the LEIPLINE newsletter of the UNF Local Economic Indicator Project at UNF.

If not?

“If consumers do not spend, we face the potential to fall into the malaise that has gripped Japan for two decades,” it says, referring to Japan’s slow growth, bouts of deflation and higher than normal unemployment.

And that’s not all.

“How the U.S. economy recovers from this recession could generate a major structural shift in how Americans will be employed in the future and general productivity of our economy for the next several decades” says the LEIPLINE.

So far, holiday spending seems stronger than last year, but discounting and bargain hunting have driven sales, says Paul Mason, a UNF economics professor and director of LEIP.

Mason and seven current UNF students collect and analyze data monthly for the local and area economy.

Overall, the third quarter, which was July-September, was the 10th consecutive weak quarter for Jacksonville and the nation for the data studied by LEIP.

“The outlook for Jacksonville continues to be weak for the fourth quarter of 2010,” it says, referring to the three months that end Dec. 31.

The national recession began in December 2007 and ended as of June 2009.

“The recovery appears to be very slow nationally, but given that this recession has adversely affected Jacksonville more than usual, this is worse news here than elsewhere.”

The LEIP analysts say that state government and businesses should continue to invest where the payoff is best.

“Innovative small businesses and new industries will be the key to future growth,” it says. “This requires a workforce that is well educated and well motivated.”

The newsletter calls on Gov.-elect Rick Scott and the Legislature to “reverse trends” and “start to invest in Florida instead of limping along.”

The newsletter also summarizes some local economic indicators.

• Inflation. Inflation, as determined by the Consumer Price Index, continues low in Northeast Florida and the outlook for this final quarter of the year “appears to be more deflation,” says the newsletter.

“Deflation sounds like a good thing,” says Mason, with “consumers paying lower prices for the products they buy.”

However, lower prices for consumers mean lower margins for producers and retailers, says Mason, which mean less investment and less hiring.

“Deflation derives from either a very strong economy or a very weak one, and it is obvious which of those two is present as this decade comes to an end,” he says.

The newsletter says that the outlook for price increases is weak given the deep discounting that retailers are using to attract customers into the stores and onto the web, says the newsletter.

Businesses that face higher costs for raw materials and semifinished goods have to be selective about raising prices.

The newsletter says that some evidence of what some construe as price-gouging due to the holidays or high-demand events, such as higher gas or food prices around sporting events or travel, is “an attempt to extract higher revenues from specific sales without raising prices in general.”

Further, the prevalence of coupons and special offers this holiday season “is unprecedented.”

“The local labor market has revealed very little improvement and we continue to be concerned that a structural shift has taken place toward greater productivity of labor and the ability to bolster profits without additional employees,” says the LEIPLINE.

The key, it says, is to grow the number of jobs versus the growth of the labor force.

“A sizable decline in unemployment rates will require considerable increases in employment, particularly by small businesses, but unfortunately, that movement still seems several quarters, if not years, off,” it says.

• Stock prices. Stocks of local companies are well below the Dow Jones’ performance, says LEIPLINE. The stocks of local headquarters and of companies with a strong local presence are both below the Dow.

“For the last six quarters, we implied that local stocks seem to have been hit harder than the Dow companies due to the substantial presence of financial companies in Jacksonville, and the third-quarter numbers reveal that we continue to be correct,” says the LEIPLINE.

“We hate to be repetitive, but construction and both residential and commercial real estate declines continue to contribute significantly to the local weakness,” it says.

The analysts don’t expect local stocks to improve substantially relative to the national blue-chip stocks until both financial firms and real estate improve locally. “But that is a long way from happening,” says the newsletter.

The LEIPLINE writers say that the recent recession was so long, at seven quarters, that its aftereffects in terms of slow growth and persistent high unemployment arose because the fiscal side of government (which decides how much federal money to spend and on what) and the Federal Reserve Board (which decides how to set interest rates in order to guide borrowing and spending and regulates the banking system) “were less than appropriate for the causes and consequences of the downturn.”

The newsletter says the “Great Recession” began with the rise in oil prices in January 2007, attracting investors to oil futures and away from investments in financial markets and real estate assets, “which exposed the faulty lending practices in the mortgage industry and precipitated the crash.”

The crash in October 2008 came three months after oil prices peaked at $147.29 a barrel, says LEIP.

The newsletter says government’s response hasn’t been on target.

“We contend that tax cuts to businesses, encouragement of particularly small businesses, and restructuring of regulation to reduce the costs of doing business are the best approaches.”